Let's hear Rajkiran Rai, MD & CEO, Union Bank of India speaking more about the bank recapitalization.
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NewsTranscript
00:00 A very good morning, ladies and gentlemen. I think Madam Ashima Goyal made my life easier
00:15 by putting across the complexities of this economy. I think it is a real complex economy.
00:23 Maybe we may have to rewrite some of the economic theories as we go forward. Such a complex
00:28 economy and we are a part of it and maybe some of the things which I will touch is again
00:32 an extension of those issues which are flagged. The topic which they gave me is something
00:43 like which can really get some very critical comments. It is on will bank recapitalization
00:51 help people and boost credit. Is there any other way out? I think this is the only way
00:59 the recapitalization has to boost credit and it has to help people because the kind of
01:04 complex things which came in the earlier speech actually, we have not found an alternative
01:10 for the banking system yet to meet the credit requirement of this economy. Even though bond
01:15 market we said that it will evolve, we thought the NBFCs can occupy this space, but I think
01:21 the events in the last few months have again put the ball back in the court of the banks
01:27 and maybe for a few more years I think bank will continue to be the institutions which
01:32 will support the growth of the economy. In that context, let me put across some of the
01:39 issues on the recapitalization and the issues what we face and how we are slowly coming
01:44 out of those issues.
01:47 The challenge is basically when we talk of recapitalization, people ask is it throwing
01:53 good money after bad, is it wasting the taxpayer's money, so ultimately for the misdeeds of someone
02:02 whether the taxpayer is footing the bill. So I think maybe in the next few minutes I
02:07 would like to address these issues. Anyway, I'm thankful to Outlook Money for providing
02:12 me this opportunity to put across some of the banker's perspectives on this issue.
02:18 Before we get into the specifics of recapitalization and how will it help people and credit growth,
02:24 it is important that we set the context right. To seek answers, it is equally important to
02:29 ask the right questions. I will attempt to clear the haze by raising a few questions
02:34 and then proceeding to share my mind on these.
02:37 First, whether bank credit growth slowed for want of capital. This is a very important
02:42 question to be asked because a lot of people say the credit slowdown is because for lack
02:47 of capital. The second question is what purposes have banks used the recapitalization money?
02:54 Here I would like to put some numbers also when I speak about this to understand how
02:59 the recapitalization money has been used. Third, where to put money if banks are to
03:04 lend again? Finally, what we learned from the entire credit cycle that played out in
03:10 the last decade.
03:11 So, first I will touch on capital adequacy as restraint on credit expansion. It is almost
03:19 too logical to say that banks need to have capital to lend as regulations ensure that
03:25 every incremental exposure is risk weighted as per the risk foreseen. Accordingly, capital
03:32 is to be maintained. As a rule of thumb, if I have to lend 100 rupees, I need 11.5 rupees
03:38 as per the new Basel norms. It comes down if I am able to pick up good customers where
03:43 the risk weight is lower, which banks did in the last two years trying to bring down
03:47 the risk weighted asset so that we manage our capital better. But at the same time,
03:51 there are certain sectors of the economy suffered because there was a risk aversion looking
03:56 for only the good quality assets and high risk rated accounts, not to lend to the lower
04:01 risk rated customers because that was the strategy of the banks to maintain their risk
04:06 weighted assets and the capital requirement.
04:10 So I think the capital requirement went up. One was the Basel III norms which started
04:17 kicking in and at the same time the huge provisioning requirements which parallelly came in because
04:22 of the recognition of the non-performing assets in the system. So generally we accumulate
04:29 our capital by way of profits.
04:34 So generally public sector space generates about 1.5 lakh crores of profit every year.
04:41 Even 2016 and 17-18, this did not change much despite all these issues. We really generated
04:47 operating profit of 1,50,000 crores. At least 50% of which could have gone for the capital
04:53 of the public sector bank space had the provision requirement not there. So this would have
04:59 really helped the economy to grow but anyway we had some inherent issues to be factored
05:03 in.
05:04 So to put some numbers, last three years, so two years, nine months, I was looking at
05:09 the numbers, the banking industry made a provision of almost 6 lakh crores in this period, out
05:15 of which roughly 2 lakh crores came from the government recapitalization. It is not that
05:20 the whole money went to the provisioning but most of the banks it went for provisioning
05:25 for the losses what they did so that they maintain adequate capital. A rough estimate
05:29 show about 70% of the money was used for provisioning requirements, about 30% went for growth and
05:35 some better banks where they used for definitely leveraging their balance sheet for better
05:39 credit growth.
05:41 So when about 2 lakh crores of capital came in, banks generated about 4 lakh crores of
05:46 operating profits which also went for the provisioning which could have otherwise gone
05:50 for capital creation, maybe would have helped the credit growth in the economy which was
05:56 not so. So it went for mostly the cleaning of the balance sheets.
06:02 So why this problem came in in the first place? Because I think most of the audience here
06:08 because there are a lot of discussions which continuously take place on the issues which
06:13 banks face, why NPA happened in such a big numbers and what happened, like why the regulator
06:20 could not act, why the government could not act, why the banks did not realize. Anyway
06:25 those issues are discussed again and again and there are a lot of thesis, hypothesis
06:30 on this. I would not like to examine that. Suffix to say, the reasons for the huge NPAs
06:36 was the huge credit expansion which happened in the earlier phase, particularly on the
06:41 infraspace like roads, the ports, then the thermal power and a lot of other industries
06:48 where the investment was required and the public sector banks played a major role in
06:51 funding this infrastructure. Then there are a host of external and internal reasons which
06:56 came in, external by way of the Euro crisis and other issues which came in and also internal
07:02 because of the policy paralysis which we saw and the legal interventions which came in,
07:08 lack of clearances from various government departments to complete the projects and then
07:14 the economy going down and the demand meltdown which also happened. All the factors really
07:21 like resulted in ultimately like the accounts going bad and we had to forcibly go for the
07:28 provisioning and use a lot of the profits and the government money for the provisioning
07:34 requirements.
07:35 So again another issue is when we talk of provisioning, a lot of people take this as
07:42 the money lost. I think here as a banker I would like to clarify, whatever provisioning,
07:49 I said two years, nine months, about six lakh crores of provisioning, what we did, it is
07:54 on the expected losses. It is not that this loss is incurred. So this loss is on the,
08:01 whatever loss we booked, it is because of the provisions and also because of the expected
08:05 losses. If I hold 60% provision or a 70% provision in the account, it is not that it is lost.
08:12 It is lost only when the settlement happens, a particular portion of the amount has to
08:16 be written off, then only that is lost. Otherwise if you are able to recover more than what
08:20 you have provided for, I think you write back a lot of money.
08:23 So I think this provisioning what we have done, it is a prudent measure by way of banks
08:28 to clean the balance sheet, to give comfort to investors and the world as a whole, saying
08:33 that the balance sheets are cleaned and we have sufficient provisions for anticipated
08:37 losses. But then I will make it very clear that whatever losses we incurred are not actual
08:42 losses, it has gone for provisioning and there is a reserve built for expected losses and
08:47 the losses will be booked gradually as we resolve issues one by one.
08:52 So whether this lack of recapitalization affected the credit growth? I think this is the question
09:00 which I asked in the first place and I tried to factor in some of the other views in between.
09:05 Yes, 2009 to 2014 the credit growth was around 26%. 2014, 2009 to 2014 the credit growth
09:15 was around 16.7%. It slowed down a lot in the last five years. But there were banks
09:21 with better capital. Who could have lent? They didn't lend. I think that's where the
09:27 NBFCs came in. So it was basically, it is not because of the lack of capital, it was
09:33 one of the factors, but there was basically issues because the issues may be on the probity,
09:39 issues may be on the risk management practices of the banks. So the whole system somehow
09:45 lost confidence on the long-term lending for some time. So the credit growth in a major
09:52 sector got affected. But if you look at the service sector and the personal loan space,
09:56 the credit growth was very strong. All the banks were lending in that area and the growth
10:01 was in high double digits. So actually if you look at the credit growth in a banking
10:07 system, for lack of capital the credit growth did not stop. Credit growth was happening
10:12 in sectors where it can happen. But then because of certain issues which we faced, banks were
10:19 getting their act together. There was a bit of anxiety among the bankers about all the
10:24 risk management practices and other issues which evolved. So basically there was some
10:28 kind of risk avoidance, avoiding lending to certain sectors. I think lack of capital was
10:34 but for one reason, but there were many other reasons where like the banks could not lend
10:39 at that point of time. So during this period, private banks and NBFCs played a very active
10:44 role in picking up a lot of share of the public sector banks and growing very fast, which
10:49 has created its own problems now which we are facing. But then actually overall credit
10:54 growth in the economy, I feel personally it would have affected to a bit of lack of capital,
11:00 but then I think it was not the sole reason for low credit growth.
11:04 So how we use the recapitalization money, the second point. So I think I tried to touch
11:16 on some of the issues like there were about 2 lakh crores of recapitalization which came
11:20 in during this period, about two years, nine months. A portion of that, a major portion
11:25 of that has gone for bank balance sheets for making provisions for expected losses. So
11:30 with the deterioration in asset quality and the progressive implementation of Basel III
11:36 warranting higher buffers, troubled public sector banks received capital infusions via
11:41 the issuance of recapitalization bonds and budgetary support. Government has infused
11:48 capital in PSBs intermittently in the last three years, but about 70% of the infused
11:53 capital was absorbed into losses incurred by them. So it is important to note that banks'
11:59 losses are anticipatory in nature and not actual losses.
12:07 So when we examine these aspects like the lack of capital was not the sole reason for
12:16 slow credit growth and the recapitalization money went into various areas, so where to
12:22 pursue the growth now is the second question. Because I think at this point of time when
12:29 we look at the economy we see the green shoots everywhere. Because as a banker, as a practitioner,
12:35 talking to a lot of industrialists, business people, there is a lot of activity going on,
12:41 there is a very positive anticipation of economic revival and growth. So I feel the growth is
12:49 not going to come from one area, it is going to come from across the sectors. The lead
12:55 will be on the personal loan front, on the services sector, even though there are people
12:59 who are saying that there is a bubble being created on the retail space, on the personal
13:02 loan space. I think the better risk management practices across the industry which are being
13:08 followed, I am very sure that particularly the large chunk of these advances are very
13:13 safe, underwritten very, very with good practices. I don't foresee any problem in that area.
13:19 And it will continue to see high double-digit growth, particularly on the personal space
13:23 and the service sector. MSME is going to be the new retail, because if you look at the
13:28 retail, the growth has happened because of lack of availability of good data points,
13:35 and whereas in MSME it is lack of data points which was resulting in low credit growth,
13:40 because there was stress in this sector, plus banks did not have the right kind of data
13:44 to underwrite credit in MSME. That is where NBFCs are playing an active role. With the
13:51 coming of GST, I think we have better database today. The data flowing from the PSB 59 portal
13:57 indicates that about 30,000 new customers got loans. They are new to the bank because
14:04 of the GST data and the returns they are filing from the system in the last three months.
14:08 This is a huge change. So MSME can be the new retail with the new data points available.
14:14 Now I have touched on these issues. I would like to say a few points on what we learned
14:20 from all this fiasco, because ultimately people who have invested, who are the taxpayers through
14:26 which the money of recapitalization came, naturally they want an answer from us. Naturally
14:31 what you are going to do, okay, we have recapitalized, the banks are much safer today, the books
14:36 look very clean, I think we are poised for a very good credit growth now. So what are
14:41 the learnings from the system? There have been several learnings, both at individual
14:44 bank level as also at system level. Accordingly, to address the systemic vulnerabilities, there
14:50 have emerged new institutions. I would like to share five developments which are key to
14:55 credit ecosystem going forward. First is IBC, the Insolvency and Bankruptcy Code. With IBC,
15:03 there is creditor in control regime. Now the borrowers are really scared of losing their
15:09 businesses. We have seen some of the big industries changing hands, the new promoters coming in,
15:15 and today as a banker, I am on the driver's seat. Today, earlier we used to run after
15:21 the borrower, now the borrowers are after us because of the new code which came in.
15:27 We are seeing some fruits, some low-hanging fruits which are already harvested. We will
15:32 see much more now, but then this has brought a new change in the credit culture, and going
15:37 forward, when some of the legal issues are resolved and being answered by the courts,
15:42 I think maybe it will stabilize and it will give a new credit culture to this country.
15:48 Second is the shift in regulatory attitude. This is the most talked about circular of
15:52 RBI, what we call Shivaratri Circular, the 12th February circular of RBI, which removed
15:58 all forbearances in the system. Earlier, like people say, because when we saw the system
16:07 having stress, initially we came up with a lot of structuring and restructuring models
16:13 because we thought the Indian economy is strong, the growth will be back, maybe the cash flows
16:18 will be back, and maybe if you are able to structure the loans and restructure the loans,
16:22 handhold the borrower for one or two years, maybe they will be able to come out of the
16:26 problem. So we were expecting that. So a lot of restructuring schemes came in, like SDRs
16:31 and S4As, but the regulator realized this is only postponing of the problem, what they
16:36 call extend and pretend. So I think maybe that they drew a final line on 12th February
16:43 saying that all these things will go away, and from that a new paradigm shift in the
16:49 thinking of banks, regulators, and borrowers came in. So this is the second shift in the
16:54 regulatory attitude.
16:56 So third is building of new institutions to bridge information asymmetry. Now, it started
17:01 with RBI setting up the CRILIC, the Central Repository for Information on Large Corporates.
17:09 All borrowers having limits of over five crores, today the default is reported almost on a
17:15 real-time basis. The system has better information about customers. The earlier, like I'm a banker
17:21 for 33 years, so information asymmetry was very much there. Many times a borrower will
17:27 be defaulting in one bank, another bank underwrites credit for him because there is no way we
17:32 know that he has a stress in another bank. So now I think that is -- and then regulators
17:37 moved forward, setting up a public credit registry, and I think we will see that also
17:43 maybe in the next few months' time. When it happens, it is one step above that, where
17:48 we have a lot of information about all the borrowers in the system, about their borrowings,
17:53 the mortgages, what they create, the charge they create. So this will help, actually,
17:57 this institution, which will be of great help to the financial sector.
18:05 And the fourth is increased accountability of support agencies in the credit ecosystem.
18:10 When we saw NPAs, then the role of the chartered accountants, the valuers, and other people
18:16 who are supporting us in the credit ecosystem, their roles came for scrutiny. There are a
18:21 lot of discussions taking place. I think today, I think everybody has realized their role.
18:25 A lot of systems and regulations have come in, individually or internally, from their
18:29 own organizations and also from these people, which is, again, like will help better credit
18:35 underwriting processes.
18:37 Then finally, the government issuing reforms to improve the internal working of public
18:41 sector banks. This is actually called responsive and responsible banking. It is called the
18:47 EASE agenda. Now, they are split into various points, actually, right from customer service,
18:53 credit monitoring, credit underwriting, recovery. All the aspects are covered. And the system
18:59 has evolved where the public sector banks have been rated. And I think the first kind
19:05 of recognition for the banks which are doing well happened a few weeks back at the hands
19:10 of the finance minister, where Union Bank also got one award in Udemy Mitraport, like
19:14 for doing the MSME right. So, because there is a point system, and this will go a long
19:20 way in strengthening the public sector bank monitoring space and the way we do banking.
19:25 It is called responsive and responsible banking. And these five things are the major changes
19:31 which have happened.
19:32 So, the confidence what I want to give to you here is, right lessons have been learned,
19:38 right kind of institutions are being built, banks are getting their risk management practices
19:42 right. The credit underwriting process have been strengthened, the verticalization, centralization,
19:48 all these processes are getting into the public sector space. So, I think with this, we will
19:54 see good credit growth. I think the last installment of recapitalization which came in has helped
20:01 a lot of banks to even come out of PCA. Not only that, for banks like us, it will help
20:06 us to improve our provisioning coverage to the expected levels and also gives us some
20:10 growth capital. And I am very sure as we go forward with some good resolutions happening,
20:15 we will have sufficient capital to grow and we look forward for a new India where the
20:20 credit requirement is not only of the large corporate borrower, but also of the small
20:25 borrowers are met by the banking system for the few years to come before the other institutions
20:30 really develop and take this space of long-term lending. Till then, we need to handhold and
20:36 we all work together to build this new India. Thank you and I thank Outlook Money for providing
20:43 me this opportunity to put some of the perspective of the bank across and thank you very much.
20:50 Thank you so much Mr. Rai. So, please do stay with me as I invite Ms. Vidya to please join
20:54 me on stage to present a token of our gratitude to Mr. Rai. So, thank you very much for that
21:00 very deep diving into the subject. Thank you so much.
21:04 Let's hear it for Mr. Rai once again, ladies and gentlemen.
21:15 (upbeat music)
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